Limited Liquidity Injection

The recent decision by the Reserve Bank of India (RBI) to trim the cash reserve ratio (CRR) by 50 basis points was intended to ease liquidity and address growth concerns. However, early analysis suggests that this move may not translate into significantly lower deposit rates anytime soon. While the CRR cut releases a substantial ₹1.16 lakh crore into the banking system, it appears to be a drop in the ocean when considering the larger financial flows.

According to a report from Union Bank of India, the liquidity boost from the CRR cut is somewhat offset by foreign exchange outflows, which amount to a much larger ₹2.95 lakh crore. The impact on banks’ profitability, as measured by net interest margins (NIMs), is also minimal, estimated at a mere 3-4 basis points. This modest improvement in profitability is unlikely to incentivise banks to reduce deposit rates substantially in the current environment.

Rate Cut Roadblocks

Several factors are contributing to the stickiness of deposit rates. Mergers within the non-banking financial sector have intensified competition for deposits as banks strive to stabilise their credit-deposit ratios. Furthermore, banks are gearing up for revised liquidity coverage ratio (LCR) guidelines in FY26, requiring them to maintain higher levels of liquid assets. This regulatory pressure is expected to further fuel competition for deposits, preventing any significant fall in deposit rates. Declining CASA ratios also add to the pressure, increasing the cost of funds for banks and making deposit rate cuts less attractive.

Summit Focus on Stability

These challenges in managing deposit rates are mirrored in broader discussions about financial stability and sustainable growth. A recent Banking and Finance summit in Hyderabad brought together experts to deliberate on these very issues. Dr. C Rangarajan, former RBI governor, emphasised the crucial need to align credit growth with the economy’s potential while maintaining financial stability. The summit also highlighted the transformative role of AI and fintech in expanding financial inclusion, whilst stressing the importance of ethical practices and balanced credit disbursement to prevent over-indebtedness. The convergence of credit and deposit growth, as noted in RBI’s Financial Stability Report, further complicates the outlook for deposit rates. While credit growth is anticipated to pick up, it may not be robust enough to significantly alter the deposit rate scenario.

Looking ahead, deposit growth is projected to remain steady, and with credit growth potentially moderating, the pressure on deposit rates might ease marginally. However, the interplay of liquidity dynamics, regulatory changes, and inter-bank competition will ultimately determine the direction of deposit rates in the near term. Banks may find themselves focusing on optimising their funding mix, shifting away from expensive bulk deposits to manage costs effectively.

Banks will need to look beyond simple rate adjustments and focus on strategic funding and lending practices to navigate the current economic landscape effectively.